After years of not setting aside enough money, state pension funds are looking at a $1 trillion shortfall in what they owe workers in benefits, according to a new analysis from The Pew Charitable Trusts.
State retirement systems caught a break with strong investment returns in fiscal 2014, but the gap is expected to top $1 trillion in fiscal 2015, the last fiscal year with full results.
"The lesson here is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term," the report said.
While many states have cut benefits for new workers and frozen plans for current staff, they cannot cut benefits that have already been earned by public employees. That means they have to find money to make up the shortfall by cutting other programs, raising taxes or both.
The report is based on the most recent data from all 50 states, which are typically reported as much as a year after each fiscal year ends.
States were to make up $35 billion of their unfunded liabilities in fiscal 2014, leaving a shortfall of $934 billion. That's because of unusually strong returns averaging 17 percent in 2014, according to the study. But average returns fell sharply in 2015, it said, to just 3 percent.
The numbers for fiscal 2016, which ended on June 30 for most states, won't be reported for some time. But investment gains are expected to work against them. Pew reports that public pension funds had negative average returns during the first three quarters of the latest fiscal year.
Those lower returns mean states with badly underfunded retirement plans will have to set aside more tax dollars to fill the shortfall.
States with the biggest funding gaps include Illinois and Kentucky, the two worst-funded systems, with just 41 percent of what's needed to pay the benefits promised to public employees. New Jersey has set aside just 42 percent.
Only three states have set aside enough money to fully pay retirement benefits owed to current and futures retirees: South Dakota (107 percent of liabilities), Oregon (104 percent) and Wisconsin (103 percent).
State pension fund debts have been growing since 2000, after falling in the preceding decades. The last time they were fully funded was the late 1990s, when a stock market boom generated returns that left them with a surplus of funds to pay benefits.
